Advisor Talking Points: Coronavirus – Federal Reserve Cuts Rates to 0%!

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WASHINGTON, DC - MARCH 03: Federal Reserve Chair Jerome H. Powell announces a half percentage point interest rate cut during a speech on March 3, 2020 in Washington, DC. (Photo by Mark Makela/Getty Images)

WASHINGTON, DC – MARCH 03: Federal Reserve Chair Jerome H. Powell announces a half percentage point interest rate cut during a speech on March 3, 2020 in Washington, DC. (Photo by Mark Makela/Getty Images)

 

TALKING POINTS
For Financial Advisors 

by
Paul Dietrich
Chief Investment Strategist
Riley Wealth Management

The Federal Reserve, late Sunday night, cut its benchmark interest rate to almost zero and launched a $700 billion quantitative easing program in response to the stock market’s decline caused by the Coronavirus.

From a long-term perspective, this rate cut will ultimately benefit the stock market.  But from a short-term perspective, many investors saw this as a hasty and desperate move from an Administration that has not distinguished itself by providing the nation with a clear message and coherent plan as to how to bring this epidemic under control.

This action will cause some short-term volatility this week before analysts can quantify the benefits of the rate cut to the U.S. economy and stock market.

Big Question: How Long Will This Disruption Last?

Dr. Anthony Fauci, one of the nation’s leading experts on pandemics, said Friday that “disruptions to everyday life in the U.S. could last up to another eight weeks.”

Several cities and states have banned large gatherings, closed schools, sporting events, subways, restaurants, and bars, and businesses are requiring their workers to stay at home. Americans are generally being encouraged to limit their movements to slow the spread of the Coronavirus.

Dr. Fauci said on ABC’s “Good Morning America,” “if you look at this historically, how these things work, it’ll likely be anywhere from a few weeks up to eight weeks or more,” adding that he hopes it’s going to be only two, three or four weeks.

So-called “social distancing” measures are crucial to slowing the spread of the Coronavirus and ensuring that hospitals are not overwhelmed by an influx of patients. Dr. Fauci said the “U.S. had not peaked yet in terms of the number of cases.”

Asked if the U.S. is heading toward a gradual shutdown of most businesses, Fauci replied: “I’m not sure we’re going to get to that. I think that would be rather dramatic, but I can tell you that all things are on the table. We have to respond as things evolve over the days and the weeks.”

Coronavirus panic selling has driven the Dow Jones Industrial Average and the S&P 500 Index into bear territory.

However, there are reasons to be reassured coming out of China, specifically in Wuhan, the epicenter of the outbreak.

Over the weekend, in a sign of an improving situation in Wuhan, China, the last two of 16 temporary hospitals built to help Coronavirus patients were shut down. The previous patients were discharged to cheers from onlookers as containment measures put in place appear to be working well to curb the spread of the virus.

As you can see from the chart below, on February 12, over 13,000 cases were reported that day. Now, nearly six weeks later, daily new case levels have dramatically dropped to less than ten a day. Eight were reported last Friday. The city of Wuhan has been on lockdown for almost sixty days now.

 

If one looks at the history of pandemics, stock markets have usually begun to recover as the number of newly diagnosed cases stabilized—they do not necessarily have to decline.

 

If one looks at the history of pandemics, stock markets have usually begun to recover as the number of newly diagnosed cases stabilized—they do not necessarily have to decline.

On the two graphs below, it seems that the cycle the virus takes is a similar pattern in each country. Once the first deaths are reported, the cycle of new cases peaks about a month later and then significantly declines for another month.

In his comments above, Dr. Fauci said he expects the cycle to play out similarly here in the United States and that our lives could return to normal in six to eight weeks.

Chart Coronavirus cases in China

(Source: Worldometer)

Chart of coronavirus cases in Korea

(Source: Worldometer)

 

Everything Is Closing Down—This Must Have an Effect on the Economy!

This week, I am conducting a major analysis of how the Coronavirus disruption will affect the earnings and revenues of all the major sectors and industries in this country. I will bring you my findings next Monday in this report.

If, in the end, we only have three or even four months of disruption in our lives caused by the Coronavirus here in the United States, it will only have a relatively small impact on the overall long-term economy this year.

Most people are still working from home, and business is still being conducted.

However, some industries where people gather together, like transportation, tourism, retail, airlines, cruise ships, hotels, entertainment events, sporting events, theme parks, restaurants, and bars, will suffer significant declines in revenues and profits over the next two quarters. These are the most visible industries and sectors that are being hurt—but, as a percentage, these are not the largest industries and sectors in the U.S. economy.

For the past few weeks, major investment banks and global economic institutions have been frantically working overtime trying to quantify the damage this epidemic will inflict on the U.S. economy.

Here are some of the analyst’s reports that have been released in the past week:

‘Every year influenza, or seasonal “flu,” affects employers and businesses. Flu costs the U.S. approximately $10.4 billion in direct costs for hospitalizations and outpatient visits for adults.” (Source: CDC)

“Economists have been using the SARS epidemic to put the coronavirus outbreak in context. The 2003 SARS epidemic is estimated to have shaved 0.5 percent to 1 percent growth that year and cost the economy about $40 billion.” (Source: CNBC)

“A study from the Society for Risk Analysis published estimated the potential GDP loss of the Swine Flu H1N1 pandemic outbreak to be between $34.4 billion and $45.3 billion. In 2009–2010, the H1N1 virus spread quickly across the country and was classified as a pandemic.”

“The Zika virus resulted in a $1.2 billion loss to U.S. GDP.” (Source: CDC)

Moody’s Analytics says the economy will take an economic hit of $120 billion loss to 2020 U.S. GDP from the Coronavirus.”

“Overall, we see a weighted average hit of 1.5% to 2020 global GDP and 0.2% to long-run global GDP. We forecast a muted long-term impact because damage to productive capacity will be small, plus economic confidence should quickly return once the virus subsides. We forecast an average negative 0.2% long-term impact on global GDP due to COVID-19, which is quite small compared with the market reaction thus far (on average, the fair value of equities should vary in line with GDP). Even in our bear case, we forecast just a 0.6% long-term decrease in GDP.” (Morningstar March 10, 2020.)

“Following U.S. 2.0% growth in the first quarter of this year, we now look for 1.1% GDP growth in the second quarter, followed by 1.9% growth averaged over the rest of 2020. This yields 1.8% growth this year, down from last month’s forecast of 2.1% growth.”  (Source:  IHS Markit chief economist Joel Prakken)

“We have revised the estimated drag from the virus to 0.4 percentage point, or $80 billion, bringing our 2020 GDP forecast to 1.3%.” (Source: Lydia Boussour and Gregory Daco, U.S. economists at Oxford Economics)

The New York Fed Staff Nowcast GDP estimate, revised lower on Friday, stands at 1.7% for the first quarter and 1.3% for the second quarter. News from this week’s data decreased the forecast for the first quarter by 0.4% and decreased the second-quarter estimate by 1%.”  (Source: The New York Federal Reserve)

Economic activity should begin to normalize in the third quarter and rebound more robustly in the final three months of the year. On net, we expect growth this year to come in near 1.6%, about 0.6% below our previous forecast. Offsetting this weaker near-term profile, we have upgraded our 2021 growth forecast to 2.5%, helped by a more accommodative Fed stance.” (Source: Brett Ryan, U.S. economist at Deutsche Bank)

“The GDPNow model estimate for real U.S. GDP growth (seasonally adjusted annual rate) in the first quarter of 2020 is 3.1 percent on March 6, up from 2.7 percent on March 2.” (Federal Reserve of Atlanta, March 6, 2020.)

SUMMARY: Currently, because of the Coronavirus epidemic, the average GDP growth rate has declined for 2020 to about 1.6 percent growth. 1.6 percent growth is still growth!  None of the major investment banks and global economic institutions are predicting a recession as a result of this Coronavirus epidemic.

Historically, about six months after the World Health Organization declares an epidemic a “Global Health Crisis,” the stock market is on its way back to new highs.

For investors, the best strategy is not to be panicked into selling but to ride out this three or four-month disruption and focus on your health and the health of your family.

We know this is a very fearful time, but B. Riley Wealth Management is here for you, and we will continue to share our stock market views every Monday.  Thank you for reading.

NOTE: this Report is authorized for distribution to clients

Paul Dietrich is the Chief Investment Strategist for B. Riley Wealth Management.  B. Riley Wealth Management offers comprehensive financial solutions to clients through its network of

over 160 experienced financial advisors across 13 states. The firm manages more than $11 billion in client assets and serves approximately 34,000 client accounts.

 

IMPORTANT DISCLOSURES:

This analysis and commentary are the opinions of Paul Dietrich, Chief Investment Strategist, B. Riley Wealth Management.

This material is for general information only and is not intended to provide specific advice or recommendations for any individual. There is no assurance that the views or strategies discussed are suitable for all investors or will yield positive outcomes. Investing involves risks including possible loss of principal. Any economic forecasts set forth may not develop as predicted and are subject to change.

 

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